Workers at Laem Chabang Port in Chon Buri. The US-China trade war has direct and indirect ramifications for export-dependent countries like Thailand and its neighbours. (Photo by Apichart Jinakul)
Although it’s still early days in the so-called “trade war” between the United States and China, its knock-on effects are already palpable. Both sides have accused each other of unfair trade practices, and both have imposed a series of tit-for-tat tariffs and other protectionist measures that could lead to a runaway retaliatory logic and spiral beyond anyone’s control.
It is time to start thinking about coping strategies in Southeast Asia and particularly in Thailand.
To be sure, contemporary trade friction among states is not new. The US and the European Union (formerly the European Community) were infamous for holding hostage the Uruguay Round trade liberalisation agreement in the latter 1980s because of disagreements over agricultural policies. Over the same period, Japan’s automobile exports faced stiff resistance in the US as the latter’s trade deficit ballooned. In the event, the Japanese had to unilaterally limit their auto exports to the US and concede to an oxymoronic policy of “voluntary export restraints”.
In the 1990s, prior to its entry into the World Trade Organisation in 2001, China also faced US tariffs for its lack of intellectual property right (IPR) protection. What makes the ongoing US-China trade friction different than previous trade rows is its sense of scale.
Unlike the EU and Japan, China is not historically beholden to the US, which was instrumental in the post-war reconstruction of Europe and Japan. China rose up on its own two feet. Moreover, the US has never had a leadership that dismisses and undermines the world trading system as does current President Donald Trump.
The Trump administration’s aggressiveness, combined with China’s assertiveness, make for a combustible mix in terms of trade and many other fronts of bilateral engagement between the two giants.
This means that what we see as a US-China trade war is likely to get worse. Here are some of the already evident consequences.
While the direct and immediate trade-specific impact from this tariff war is still limited, the indirect ramifications are more complex and consequential on supply chains.
As widely noted, the first round of the trade war took place in early July when the US announced 25% tariffs on US$34 billion worth of Chinese imports, mainly industrial and tech products, and a further $16 billion on other goods, totaling $50 billion.
In the following week, China struck back with an equal tariff of 25% on $34 billion of US imports comprising mostly agricultural goods, such as meat, fish, seafood, soya beans, vegetables and produce, dairy, whisky, tobacco products, dog and cat food, vehicles, and later added another $16 billion at the same tariff rate.
The US fired another tariff salvo a month later on $200 billion of Chinese imports, this time aiming at multinationals that outsource their intermediate product manufacturing to China. The products that will be hit with tariffs at the end of August are mostly industrial goods, such as tractors, plastic tubes, and measurement equipment like speedometers.
What should be noted here is the different degree of global integration among industries that are being targeted. This difference will determine the nature of the direct and indirect impact on both sides and beyond.
The Trump administration has targeted tech-intensive intermediate products from China, such as motorcycles, industrial chemicals, and electronics. China’s trade retaliation, on the other hand, focuses on agricultural commodities from the US that can also be sourced from other countries, such as soya beans, and cotton, which can be supplied by Brazil, Argentina or India (for cotton). But the US targeting is specific to Chinese-made intermediate and final products, which have contributed to the US trade deficit.
This difference carries important implications for the potential impact of the bilateral trade dispute. Moreover, it will have ricocheting effects on other countries, particularly those in export-dependent SE Asia.
The more globally integrated an industry, the greater the impact that will be felt more broadly by countries that are part of that particular value chain. At the same time, sectors whose supply chains are more contained in one country — for example, agricultural commodities — are likely to see a more concentrated impact in that particular location.
This explains why China is targeting soya beans and cotton, two commodities of which the US is the world’s top exporter and their farmers Trump supporters. The impact on such sectors is likely to be more direct and immediate, putting pressure on global prices and creating more competition for domestic farmers in other countries.
On this score, positive benefits can be expected for agribusiness firms in Thailand and Southeast Asia, as soybeans are a key raw material for animal feed.
What is more worrisome is the adverse impact that could follow from the increased tariff war on intermediate products. Global trade and investment today is driven by flows of intermediate goods that make up global value chains of myriad industries.
Tariffs and other trade barriers on these integrated trade flows would be felt in both a direct and indirect manner by countries that are export-dependent like Thailand and its neighbours in Southeast Asia.
Direct and trade-specific consequences would be felt by Thai and Southeast Asian exporters that are integrated in the supply chain of those industries targeted by both China and the US. The indirect impact, however, would be broader should this trade war result in a slowdown in both countries as they are both major export markets for export-dependent countries in Southeast Asia.
While this immediate and direct impact for Thailand is expected to be limited, at around -0.04% of GDP at most, according to Thailand Development Research Institute, the indirect impact that could result from growth decline in both economies should not be overlooked.
China has replaced the US as Thailand’s top export market since 2009, according to Customs Department statistics compiled by the Bank of Thailand. China also became the most important single country trading partner for Asean, replacing the US in 2010. A major slowdown of these two economies bodes ill for Thai and Asean exporters.
However, some positive outcomes could be expected with investment flows heading more toward Southeast Asia, as Chinese and US firms seek alternative locations for their export and assembly bases. On this front, Thailand faces strong competition from Malaysia, Singapore and Vietnam.
Not only are these three countries already signatories of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which would make them more aligned with trade and investment regulations among other major signatories, they also offer other draws for incoming investors looking for alternative supplier bases away from China.
Vietnam’s relatively lower costs make the country more suitable as an assembly platform for industries that are still cost-sensitive.
Malaysia and Singapore’s well-established supply networks in electronics would be attractive for firms that need to supply those products away from China.
Overall, the US-China trade tussle may deteriorate to depths that have not been seen for decades. Thailand and other Asean economies will have to navigate and refocus their efforts on regional mechanisms to cushion the adverse impacts from this trade war and to minimise intra-regional competition in the process.
Thailand and Asean are in the same boat now more than ever.
Pavida Pananond is an Associate Professor of International Business at Thammasat Business School, Thammasat University.